American Rescue Plan Act: Tax provisions, program updates
On March 11, 2021, President Biden signed the American Rescue Plan Act (“the Act”), a $1.9 trillion COVID-19-relief stimulus package.
The Act extends the unemployment benefits that were set to expire March 14, and provides expansive pandemic relief funding for individuals, businesses, and state and local governments, including a new “Restaurant Revitalization Fund” and new Paycheck Protection Program (PPP) funding. Its numerous tax provisions include expansion of the Earned Income Tax Credit (EITC) and the Child Tax Credit for the 2021 taxable year, and extension of the Employee Retention Credit (ERC).
Read on for an overview of some of the Act’s key tax and economic relief measures. Note that this is not a comprehensive review, details are subject to change, and administrative guidance on many of the Act’s provisions is expected to be released in the coming weeks. We are watching developments closely and will provide more information, including some closer looks at industry-specific impacts, over the weeks ahead. Watch our Coronavirus Resource Center, our Tax Alert page, and our new C-Suite Dashboard resource center for updates. In the meantime, please consult your accountant or your tax advisor with any questions on how these provisions might impact you and your business.
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Extension of Employee Retention Credit (ERC)
The March 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act included a fully refundable federal payroll tax credit (the “Employee Retention Credit”) for employers whose trade or business was fully or partially suspended due to COVID-19 or that experienced a significant decline in gross receipts, equal to 50% of up to $10,000 of “qualified wages” paid to each employee after March 12, 2020, and before Jan. 1, 2021. The December Consolidated Appropriations Act extended the availability of the credit to the first two calendar quarters of 2021, increased the amount of applicable qualified wages to $10,000 per quarter, increased the credit amount to 70% of qualified wages, and eased the thresholds for large versus small employer status and for determining whether a significant decline in gross receipts had occurred. The new Act extends the availability of the credit to the third and fourth quarters of 2021, each with its own $10,000-per-employee maximum, and adds additional eligibility opportunities.
Payroll Tax Credit for Voluntary FFCRA Paid Sick and Family Leaves
The March 2020 Families First Coronavirus Response Act (FFCRA) mandated COVID-19-related paid sick and family leave for employees of employers having fewer than 500 employees, and provided those employers with a fully refundable federal payroll tax credit in connection with their providing those leaves. The December Consolidated Appropriations Act eliminated the mandate, but continued the availability of the credit for the first calendar quarter of 2021 for eligible employers that voluntarily provided those leaves during that quarter. The new Act extends the availability of the payroll credit to eligible employers that voluntarily provide paid leaves during the second and/or third calendar quarters of 2021, and also adds additional qualifying standards for the paid leaves; provides for a full post-second-quarter reset of the number of days for which paid sick leaves will be available; and imposes new nondiscrimination requirements.
Certain public company excessive employee remuneration
Applicable to tax years beginning after Dec. 31, 2026, the Act expands the existing denial of the employer compensation deduction for annual compensation paid by a public company in excess of $1 million to the CEO, the CFO, and the three highest compensated officers, to also include the five highest compensated employees. Under current law, these highly compensated individuals (termed “covered employees”) are permanently considered covered employees for taxable years beyond the taxable year in which they were covered employees, regardless of whether they meet the criteria in subsequent taxable years. Notably, the Act does not treat the additional five employees as permanent covered employees, but rather determines covered employee status on a year-by-year basis.
Reauthorization of the State Small Business Credit Initiative
The Act reauthorizes, for the 2021 taxable year, the State Small Business Credit Initiative (SSBCI), which was enacted in 2010 to support small businesses by strengthening state lending programs. The Act provides $10 billion for the program, with additional allocations intended to support business enterprises owned and controlled by socially and economically disadvantaged individuals, as well as “very small businesses.” States applying for federal funding under the SSBCI must meet the following eligibility criteria:
1. Demonstrate that $1 of public investment by the state will result in $1 of new private credit, at a minimum
2. Demonstrate a reasonable expectation that for each $1 of SSBCI financing received, $10 of new small business financing can be leveraged
3. Each financial institution lender must have a meaningful amount of their own capital resources at risk in their small business lending
4. Use such federal funds to extend credit to small businesses
Individuals entitled to group health plan COBRA continuation coverage during the second and/or third calendar quarters of 2021 will not have to pay for that coverage if they did not voluntarily terminate their employment, and the employer sponsoring the plan (for a self-insured plan) or the insurer (for a fully-insured plan) will be entitled to claim a fully refundable federal payroll tax credit for the amount of the premiums the individual was not required to pay. The Act also requires certain related employer notices.
Repeal of Election to Allocate Interest, etc. on Worldwide Basis
The Act repeals the long-deferred IRC Section 864(f), which was enacted as part of the American Jobs Creation Act of 2004. IRC Section 864(f) would have allowed multinational taxpayers to allocate interest expense on a worldwide basis, altering the computation of the foreign tax credit limitation under IRC Section 904, which provides for the allocation and apportionment of deductions between U.S.-source and foreign-source income.
Reporting requirements for third-party payment processors
Currently, third-party payment processors must report information to the IRS when payments are made that exceed $20,000. Effective for calendar years beginning after Dec. 31, 2021, the Act reduces the $20,000 threshold to $600.
Stimulus checks/recovery payments to individuals
The Act provides for additional cash assistance to eligible individual taxpayers of $1,400 ($2,800 in the case of a joint return), with an additional $1,400 for each of the taxpayer’s dependents for such taxable year. The one-time stimulus payments are reduced for higher-income individual taxpayers and begin to phase out for individual taxpayers with an adjusted gross income (AGI) of $150,000 in the case of a joint return or surviving spouse, $112,500 for heads of household, and $75,000 for single filers. The IRS will base these amounts on the taxpayer’s 2020 tax return, or 2019 tax return if 2020 has not yet been filed. At the time of this writing, it is not yet certain when the stimulus payments will be issued.
Child Tax Credit (CTC) changes for 2021
The Act expands the Child Tax Credit, with the intent of bringing more children out of poverty, allowing taxpayers with qualifying children who are 17 or younger to claim the credit for the 2021 taxable year (changed from 16 or younger). Additionally, the Act increases the credit amount for each qualifying child for the 2021 taxable year from $2,000 to $3,000 ($3,600 for qualifying children who have not attained age 6 as of the close of the calendar year in which the taxable year of the taxpayer begins). As with the stimulus payments discussed above, the credit begins to phase out at $150,000 for joint returns or surviving spouses, $112,500 for heads of household, and $75,000 in any other case.
Earned Income Tax Credit (EITC) for 2021
The Act includes a provision intended to strengthen the Earned Income Tax Credit (EITC) for the 2021 taxable year for individuals with no qualifying children by generally allowing such taxpayers age 19 and older (previously age 25 and older) to claim the credit. Additionally, the Act, for the 2021 taxable year, eliminates the current maximum age of 64 for receiving the EITC for such taxpayers.
For taxpayers with no qualifying children in the 2021 taxable year, the provision also increases both the credit percentage and phaseout percentage from 7.65% to 15.3%, as well as increases the EITC amount from $4,220 to $9,820 and the phaseout amount from $5,280 to $11,610.
Dependent Care Assistance
Another temporary provision in the Act, applicable only to the 2021 taxable year, adjusts the calculation for the credit for dependent care assistance employment expenses. The amount of eligible expenses has been increased, in the case where the taxpayer has one dependent, from $3,000 to $8,000, and, in the case where the taxpayer has two or more dependents, from $6,000 to $16,000. The Act also increases the percentage of these expenses that may be claimed as a credit from 35% to 50%. This means a maximum credit of $4,000 in the case of one dependent, or $8,000 for two or more.
The credit begins to phase out when an individual’s AGI exceeds $125,000. (There are additional phaseout guidelines for “high income individuals,” those with AGI of more than $400,000; see the Act for details.) Also for the 2021 taxable year, the credit is refundable.
For taxpayers who receive reimbursements from their employer, there is an exclusion from an individual’s gross income of amounts paid by an employer for dependent care assistance; the Act increases this exclusion amount from $5,000 to $10,500 (or from $2,500 to $5,250 for a separate return filed by a married individual), and the change shall apply only to the 2021 taxable year.
Health Insurance Premium Assistance
Another temporary provision in the Act that applies only to the 2021 and 2022 taxable years increases the subsidies for eligible taxpayers with coverage purchased on the Affordable Care Act (ACA) marketplaces by making the insurance indexing adjustments inapplicable to the 2021 and 2022 tax years, as well as reducing the applicable premium percentages that are considered when calculating the premium assistance amount. Also for 2021 and 2022, the Act further expands the number of taxpayers eligible for assistance by allowing households with taxable income over 400% of the poverty line to claim assistance.
Student loan forgiveness
As part of student loan reform, the Act excludes from gross income certain student loans discharged after Dec. 31, 2020, and before Jan. 1, 2026. The provision applies to student loans provided by the federal government, state governments, and eligible educational institutions, as well as certain private education loans as defined in the Truth in Lending Act.
Paycheck Protection Program (PPP)
The Act adds $7.25 billion in new funding for the Paycheck Protection Program (PPP). It also makes additional Section 501(c) nonprofit entities eligible to receive first- and second-draw loans, subject to certain conditions (below), as well as certain “internet publishing organizations.” The nonprofit entity must not:
1. Receive more than 15% of its receipts from lobbying activities
2. Have lobbying activities comprise more than 15% of the organization’s total activities
3. Have spent more than $1 million on lobbying activities during the most recent tax year that ended prior to Feb. 15, 2020
4. Employ more than 300 individuals per physical location
Shuttered Venue Operator Grants (SVOG) program
$1.25 billion is appropriated for the Shuttered Venue Operator Grants (SVOG) program. The Act also formalized the change recently released by the Small Business Administration (SBA) that allows organizations to receive both a SVOG and a first- and/or second-draw PPP loan, though the SVOG amount will be reduced by any received PPP loan amounts.
Restaurant Revitalization Fund
The Act appropriates $28.6 billion to establish a “Restaurant Revitalization Fund,” which will provide grants to restaurants (and food trucks/stands, caterers, taprooms, and other defined businesses “in which the public or patrons assemble for the primary purpose of being served food or drink”) that were economically impacted by COVID-19. Grants will be provided equal to the entity’s “pandemic-related revenue loss” – generally, the difference between their 2019 and 2020 gross receipts, up to $10 million (or $5 million per physical location) and reduced by the amount of any PPP loans previously received. Funds can be used during a specified covered period for payroll costs; payments of principal or interest on any mortgage obligation; rent payments; utilities; defined maintenance expenses; supplies, including protective equipment and cleaning materials; certain food and beverage expenses; covered supplier costs; operational expenses; paid sick leave; and “any other expenses that the Administrator determines to be essential to maintaining the eligible entity.” Significantly, the amounts received will not be included in the recipient’s gross income. Businesses cannot apply and receive for both a restaurant grant and a SVOG. Read more about this program in our hospitality-focused overview of the American Rescue Plan Act.
Economic Injury Disaster Loan (EIDL) Advances
The Act appropriates $15 billion in additional funding for Targeted Economic Injury Disaster Loan (EIDL) Advances, and provides that amounts received from the SBA in the form of these advances shall not be included in the gross income of the person receiving such amount.
Update: On March 24, SBA announced that it is more than tripling the maximum amount that small businesses and not-for-profits can borrow under the COVID-19 EIDL program.
Specifically, beginning the week of April 6:
- The loan limit for COVID-19 EIDL loans will increase from six months of economic injury with a maximum loan amount of $150,000 to up to 24 months of economic injury with a maximum loan amount of $500,000.
- Any COVID-19 EIDL loan applications in process when the new limits go into effect will automatically be considered for the new maximum limits.
- Existing borrowers will be able to request an increase.
Also, earlier in the month, SBA extended the deferral periods before recipients will have to make loan repayments as follows:
- For all SBA disaster loans made in 2020, the first payment due date is 24 months from the date of the note (extended from 12 months).
- For all SBA disaster loans made in 2021, the first payment due date is 18 months from the date of the note (extended from 12 months).
- SBA also granted an additional 12-month deferment of principal and interest payments for existing disaster loans approved prior to 2020 that were in regular servicing status as of March 1, 2020.
Various pandemic-related unemployment assistance measures were set to expire on March 14, 2021, and have now been extended through Sept. 6, 2021. The Act extends the additional $300 per week Federal Pandemic Unemployment Compensation, the Pandemic Unemployment Assistance Program, and the Pandemic Emergency Unemployment Compensation Program. It also makes the first $10,200 of unemployment insurance received in 2020 nontaxable income for taxpayers with AGI of less than $150,000.
Coronavirus State and Local Fiscal Recovery Funds
The Act appropriates $350 billion to states, territories, and local and tribal governments in order to ameliorate negative economic impacts related to COVID-19. The funds will remain available through Dec. 31, 2024.
Emergency Rural Development Grants for Rural Health Care
$500 million in emergency funding is appropriated to establish a grant program that would assist qualifying rural health facilities with COVID-19-related efforts. The funds will remain available until Sept. 30, 2023, and could be used to support the administration of the COVID-19 vaccine to rural Americans, increase medical surge capacity and telehealth capabilities, and/or reimburse revenue losses, among other potential uses.
Education relief funds
The Act provides over $125 billion to support elementary and secondary schools in reopening and addressing effects of the pandemic. Recipients must use a portion of their funds to address learning loss and other student needs through the implementation of evidence-based interventions, and there are funds designated to assist school systems in supporting homeless children and youth, as well as students with disabilities. There is also nearly $40 billion appropriated for higher education, and $2.75 billion for “non-public schools that enroll a significant percentage of low-income students and are most impacted by the qualifying emergency.”
Supplemental nutrition and utility assistance for individuals and families
In addition to the financial assistance for individuals and families described above, the Act includes provisions to provide nutritional assistance to families in need by extending the 15% SNAP (Supplemental Nutrition Assistance Program) increase through Sept. 30, 2021; enhancing the WIC program (Special Supplemental Nutrition for Women, Infants, and Children); extending the Pandemic EBT (P-EBT) Program; and providing emergency shelters with meal and supplement reimbursements for individuals age 24 and younger. The Act also includes funding to help low-income households pay for energy and water.
Included in the Act is over $21 billion in Emergency Rental Assistance Program funding, for state and local governments to use to assist those who have been financially impacted by COVID-19 and are unable to pay rent and/or utilities. There is a special provision to fast-track funds to “high-need grantees,” “with the number of very low-income renter households paying more than 50% of income on rent or living in substandard or overcrowded conditions, rental market costs, and change in employment since February 2020 used as the factors for allocating funds.” Among other housing-related provisions, the Act also includes funding to support rural renters and homeowners, people experiencing homelessness, and other at-risk groups.
$10 billion Critical Infrastructure Projects program
The Act allocates $10 billion in new funding to assist state and local capital projects intended to enable work, education, and health monitoring in response to COVID-19.
Section 3610 for Government Contractors
Section 3610 of the CARES Act, “Federal Contractor Authority,” has been extended to Sept. 30, 2021 (from March 31, 2021, as extended by the December law).
Additional funding and initiatives
The Act is a historically large, comprehensive legislative package containing a significant number of spending provisions. Below is a brief summary of some the provisions not included above. See the full Act for details on other funding and provisions, including (but not limited to):
- Over $13 billion to support COVID-19 vaccine, therapeutic, and device activities, for states, the supply chain, the Centers for Disease Control and Prevention (CDC), the Food and Drug Administration (FDA), and others
- $48.3 billion for COVID-19 testing, contact tracing, and other mitigation efforts
- $4 billion to support the food supply chain and agriculture
- Debt relief and assistance to socially disadvantaged farmers and ranchers
- $100 million to the Environmental Protection Agency to identify and address health outcome disparities from pollution and COVID-19
- $50 billion for FEMA’s Disaster Relief Fund (DRF), in addition to funding for various FEMA grant programs
- $39 billion for child care, including nearly $24 billion for Child Care Stabilization Grants for providers impacted by COVID-19, and nearly $15 billion in Child Care and Development Block Grant funding, with expanded eligibility for “workers deemed essential during the response to coronavirus by public officials”
- More than $30 billion in Federal Transit Administration grants, among other transportation-related funding (for Amtrak, airports, aerospace manufacturing, airline payroll support, and more)
- Funding for community health centers, mental health- and substance abuse-related services, and other public health and healthcare-related investments, including funding to bolster the public health workforce
- Funding for child abuse prevention programs and for domestic violence and sexual assault service providers
- $2 billion to provide federal agencies with modern technology and cybersecurity tools
- Various support initiatives for Native American communities, including for healthcare, education, housing, social welfare, and public safety
Patrick Duffany, JD, CPA, Managing Partner, Tax
Brian Newman, CPA, Partner, Practice Leader, Federal Tax Services
Stephanie O’Rourk, CPA, Partner
Jeremy Swan, Managing Principal, Financial Sponsors & Financial Services Industry
Robert C. Moss, Consultant
Dana Fried, JD, LLM, Managing Director, National Tax Services
Stephen Gregory, JD, Director, National Tax Services
Yasmina Bersbach, JD, LLM, Manager, National Tax Services
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Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
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